The Long and Short of it
December 10th, 2009
In the post-financial crisis world, there are a lot of questions swirling around regarding the demand for hedge funds and what their proper allocation should/will be within investment portfolios. Will the prior trends toward wider acceptance resume, or will they be curtailed by residual fears of loss and mismanagement?
I believe that the hedge fund world will be broken down much more specifically by strategy. It has been recognized by many for some time that there has been an artificial separation between “traditional” and “alternative” investment strategies. The alternative bucket has encompassed all types of disparate investment strategies. Going forward, analysts, investors, and plan sponsors should and will continue to incorporate a variety of strategies into portfolio structures based on the risk and return characteristics of each strategy rather than an artificial label.
The more important separation, which will become more prominent, will be between alpha and beta, where strategies that generate true alpha will continue to be rewarded, while more beta oriented strategies will be marginalized to compete with the growing array of passive alternatives. In addition, within the hedge fund arena, greater scrutiny will be placed on transparency and the need for managers to operate like their traditional counterparts, increasing their need for operational infrastructure, compliance support, and other mainstream business functions. As these resources are built, hedge funds will become more and more mainstream investment alternatives, led by those that are most easily understood and transparent. By strategy, long/short equity appears to be a prime candidate; indeed it seems that such strategies are already growing institutionally.
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Matthew Waterman | December 15th, 2009 at 11:43 AM
Hi Jeff,
Great site! I think it’s interesting that you should mention the future of hedge funds on the heels of the crisis-and-resolution in Dubai. While it appears Dubai’s situation (ponzi scheme?) has resolved itself for the time being, there is still the strong chance that it turns out to be the so-called canary in the coal mine: How long before another nation fails to back one of its large companies, resulting in another such crisis? Russia is on the edge; a collapse in Venezuala might set off a number of dominos in Asia.
Taken together with the fact that most American investors probably don’t have enough foreign exposure already, any sort of implosion might drive them further away, providing very fertile ground for more sophisticated investors. My concern would be that, once again, through a combination of rational and irrational concerns, the average investor would be left out in the cold while the hedgies would be able to take advantage of another Boom-and-Bust cycle.
-Matt
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